Short Cash-To-Cash Cycles Will Prove Important as Economy Rebounds

Strategic planning , technology and outsourcing help reduce cash to cash cycles


American exports rose 21 percent in 2010 to $1.28 trillion - the sharpest rise since 1988. As suppliers become more global, so do customers. While increasing exports is good news, shipments from Eastern U.S. to China can take up to 45 days. Traditionally, most Asian customers expect a 90-day payment term and typically pay in 95 to 120 days. The cash-to-cash process, in this instance, from raw material procurement to cash can extend to more than six months. As the economy improves and exports increase, the strain on cash might adversely affect companies without an adequate supply chain management process.

Through strategic planning, chemical companies can develop processes that drastically reduce long transit times and logistics costs while improving competitive advantage and cash flow. Establishing foreign trade zone warehouses is a strategy that can reduce inventory turnaround time when exporting to specific countries. With a warehouse established in China, product could be shipped in 10 vs. 45 days, reducing the amount of time inventory is held and reducing accounts receivable days.

Developing and maintaining an auditable duty free zone warehouse in an oversea market, however, requires expertise that, unfortunately, many manufacturing companies do not possess. That's where an outsource services provider provides support. Many 3PLs maintain a network of reliable locations of free trade zones for different chemicals as well as the processes with which to work with these outlets.

As inventory procurement becomes more globalized, establishing inventory in strategic locations that may include developing free trade zones, consignment warehouses, correct freight on board assignments, becomes more important. The goal of these different strategies is to shorten the amount of time funds remain in the inventory process.

Technology Supports Financial Flow

Technology is also an important component of the overall strategy to reduce cash cycles. Through technology, chemical companies automate financial processes and gain visibility into the financial flow to reduce accounts payable times and stretch accounts receivable. With effective business to business process automation, chemical companies are equipped to address quickly changing market conditions and increased trading complexity. Automating processes and sharing real-time information with customers, partners and suppliers also increases competitiveness and productivity.

According to an AMR Research study1, companies using more electronic connections with customers have:

13 percent shorter days sales outstanding (DSO)37 percent shorter cash-to-cash cycle times 19 percent lower total supply chain costs (including manufacturing), that translates into 5 percent of revenue

In lieu of acquiring new software and hardware to support these capabilities, 3PLs offer web-based transportation management system (TMS) technology that provide a "Visibility Manager," an aggregated (360 degree) view of the order-to-cash business process and its related transaction documents, such as purchase orders or advanced ship notices, sent through the business process network by customers and suppliers. Greater visibility means there is less uncertainty in accounts receivable and accounts payable if invoices are not correct and accounts are paid within a certain time frame.

Using TMS capabilities, chemical companies can address other supply chain issues such as complex cross-border invoicing, freight audit and payment, and benchmarking. Through better management of the supply chain, chemical companies will better manage working capital, resulting in improved cash cycles.

Now is the time to position your company to aggressively defend against C2C cycle increases as the economy heats up. By partnering with an experienced outsource, you can take advantage of their resources and experience to address a broader range of issues affecting your C2C cycle. At the same time, you may achieve further supply chain improvements that will justify the cost of using an outsource.

Francis Ezeuzoh is Chief Financial Officer at ChemLogix, LLC. He can be reached at www.chemlogix.com.

1 Bill Swanton, Debra Hofman, AMR Research, "Benchmarking B2B E-Business: The Value Is in There." January 3, 2007
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